A look at the major oil production situation elsewhere

I have just read this from Malaysiakini's beritamalaysia section and I think it helps in our understanding of our country's fuel price policy. As I have mentioned in my earlier post, I cannot understand why higher prices for oil to a net exporter of oil cannot translate into bumper profits for Petronas to take care of the subsidies. I would tend to think after reading that open letter, that perhaps our oil reserves are in fact running too low for comfort!:

View From Britain

Your Majesty, We Have Gone Mad

An open letter to King Abdullah of Saudi Arabia: Our prime minister isurging you to increase production of oil. Please ignore him. Like the other leaders he is delusional, and is no longer competent to make his own decisions.

GEORGE MONBIOT

Your Majesty,

In common with the leaders of most western nations, our prime minister is urging you to increase your production of oil. I am writing to ask you to ignore him. Like the other leaders he is delusional, and is no longer competent to make his own decisions.

You and I know that there are several reasons for the high price of oil. Low prices at the beginning of this decade discouraged oil companies from investing in future capacity. There is a global shortage of skilled labour, steel and equipment. The weak dollar means that the price of oil is higher than it would have been if denominated in another currency. While your government says that financial speculation is an important factor, theBank of England says it is not, so I don't know what to believe. The major oil producers have also become major consumers; in some cases their exports are falling even as their production has risen, because they are consuming more of their own outpu.

But what you know and I do not is the extent to which the price of oil might reflect an absolute shortage of global reserves. You and your advisers are perhaps the only people who know the answer to this question. Your published reserves are, of course, a political artefact unconnected to geological reality. The production quotas assigned to its members by Opec, the oil exporters' cartel, reflect the size of their stated reserves, which means that you have an incentive to exaggerate them. How else could we explain the fact that, despite two decades of furious pumping, your kingdom posts the same reserves as it did in 1988?

You say that you are saving your oil for the benefit of futuregenerations. If this is true, it is a rational economic decision: oil in the ground looks like a better investment than money in the bank. But, reluctant as I am to question your majesty's word, I must remind you that some oil analysts are now wondering whether this prudence is a convenient fiction. Are you restricting supply because you want to conserve stocks and keep the price high, or are you unable to raise production because your fabled spare capacity does not in fact exist?

I do not expect an answer to this question. I know that the true state of your reserves is a secret so closely guarded that oil analysts now resort to using spy satellites to try to estimate the speed of subsidence of the ground above your oil fields, as they have no other means of guessing how fast your reserves are running down.

What I know and you may not is that the high price of oil is currently the only factor implementing British government policy. The government claims that it is seeking to reduce carbon dioxide emissions, by encouraging people to use less fossil fuel. Now, for the first time in years, its wish has come true: people are driving and flying less. The AA reports that about a fifth of drivers are now buying less fuel. A new study by the Worldwide Fund for Nature shows that businesses are encouraging their executives to use video conferences instead of flying. One of the most fuel-intensive industries of all, business-only air travel, has collapsed altogether.

In other words, your restrictions on supply – voluntary or otherwise – are helping the government to meet its carbon targets. So how does it respond? By angrily demanding that you remove them so that we can keep driving and flying as much as we did before. Last week Gordon Brown averred that it's "a scandal that 40% of the oil is controlled by Opec, that their decisions can restrict the supply of oil to the rest of the world, and that at a time when oil is desperately needed, and supply needs to expand, that Opec can withhold supply from the market." In the United States, legislators have gone further: the House of Representatives has voted to a bring a lawsuit against Opec's member states, and Democratic senators are trying to block arms sales to your kingdom unless you raise production.

This illustrates one of our leaders' delusions. They claim to wish to restrict the demand for fossil fuels, in order to address both climate change and energy security. At the same time, to quote Britain's department for business, they seek to "maximise economic recovery" from their remaining oil, gas and coal reserves. They persist in believing that both policies can be pursued at once, apparently unaware that if fossil fuels are extracted they will be burnt, however much they claim to wish to reduce consumption. The only states which appear to be imposing restrictions on the supply of fuel are the members of OPEC, about which Gordon Brown so bitterly complains. Your majesty, we have gone mad, and you alone can cure our affliction, by keeping your taps shut.

Our leaders, though they do not possess the faintest idea of whether or not the oil supplies required to support it will be sustained, are also overseeing a rapid expansion of our transport infrastructure. In the United Kingdom we are building or upgrading thousands of miles of new roads and doubling the capacity of our airports, in the expectation that there will be no restriction in the supply of fuel. The government's central forecast for the long-term price of oil is just $70 a barrel.

Over the past few months I have been trying to discover how the government derives this optimistic view. In response to a parliamentary question, it reveals that its projection is based on "the assessment made by the International Energy Agency (IEA) in its 2007 World Energy Outlook." Well last week the Wall Street Journal revealed that the IEA "is preparing a sharp downward revision of its oil-supply forecast". Its final report won't be released until November, but it has already concluded that "future crude supplies could be far tighter than previously thought." Its previous estimates of global production were wrong for one simple and shockingreason: it had based them on anticipated demand, rather than anticipated supply. It resolved the question of supply by assuming that it would automatically rise to meet demand, as if it were subject to no inherent restraints.

Our government must have known this, but it has refused to conduct its own analysis of global oil reserves. Uniquely among possible threats to the economy and national security, it has commissioned no research of any kind into this question. So earlier this year I asked the department for business what contingency plans it possesses to meet the eventuality that the IEA's estimates could be wrong, and that global supplies of petroleum might peak in the near future. "The Government," it replied, "does not feel the need to hold contingency plans". I am sure I do not need to explain the implications, if its forecasts turn out to be wildly wrong.

Your majesty, I recognise that this is not among your usual duties as the ruler of Saudi Arabia. But I respectfully beg you to save us from ourselves.

Yours Sincerely,

George Monbiot

www.monbiot.com